Is Nvidia's Changeover a Good Bet?

NEW YORK ( TheStreet) -- For as well as semiconductor stocks such as Qualcomm ( QCOM), ARM Holdings ( ARMH) and Texas Instruments ( TXN) have performed over the past several quarters, it seems Nvidia ( NVDA) can't get any love.

The company is finding it difficult to convince Wall Street that it is more than just a graphics chip "has been." Investors who are willing to bet on Nvidia's ability to find growth beyond PCs may be able to capitalize on a good turnaround story. But is it worth the risk?

All About Tegra

The imminent death of the PC has filled the market with pessimism in its assessment of Nvidia's future. It's hard to argue the validity of these concerns since roughly two-thirds of Nvidia revenue still comes from PC sales.

But the company has seen the writing on the wall for quite some time. Nvidia understands that unless it reduces its dependency on PCs and broadens its product portfolio, it's likely heading to a demise of its own.

To that end, the company has developed a new mobile strategy and has been pushing its Tegra line of mobile processors. Tegra is a system on chip (SoC) that integrates many of the features of the ARM architecture into one package. Although it remains relatively unknown, Tegra's low power consumption and high performance makes this series one of the best chips on the market today.

Nvidia has been making great strides in securing new business from some prominent companies including Microsoft ( MSFT) and Google ( GOOG) where the Tegra 3 is a key component inside both Surface and Nexus 7 tablets. What's more, as Nvidia is shoring up its footing in the realm of mobility to compete more effectively with Qualcomm and Texas Instruments, the company still has not forgotten its PC roots.

Nvidia recently secured design wins in products such as Apple's ( AAPL) MacBook Pro, which features the retina display. So with all of these positive catalysts surrounding the company, the stock is still down over 10% YTD -- a little puzzling.

I think this is one story that the market may be overlooking, if not getting entirely wrong. Likewise, if the company's recent earnings said anything at all; it's that the company prospects for success are much better than previously expected.

An Impressive Quarter

In light of all of the doom and gloom related to weakening PC sales, the company delivered as solid a performance as could have been expected. In its third quarter, Nvidia reported net income of $209.1 million, or 33 cents per share, on revenue of $1.2 billion. The company beat both on its top and bottom lines while exceeding consensus estimates of 30 cents per share and revenue of $1.1 billion.

Its better-than-expected results were largely attributed to growth in consumer sales, which continue to rise, helped by increased Tegra demand. Nvidia continues to steal market share from Advanced Micro Devices ( AMD) in graphic chips even as Intel ( INTC) said a month earlier that it was hurt by rising inventories.

In terms of guidance, the company expects Q4 revenue to come in the range of $1.03 billion to $1.18 billion. While this might be slightly lower than analysts' estimates of $1.21 billion, it will represent annual growth of over 20%.

Nvidia ended the call announcing to investors its plans to pay the first-ever dividend in the company's history. The payout of 7.5 cents per share will begin Dec. 14, while also extending its current share-repurchase program by an additional two years through 2014.

Bottom Line

Another area that stood out during the quarter was the reversal of what once seemed a margin depreciation. That gross margins jumped over 1 point was indeed impressive and suggests that even as the company spends to transform its business, it keeps a focus on profitability. That said, as good as I feel about Nvidia's ability to transform itself, I don't expect Qualcomm, Texas Instruments or Intel ( INTC) to make this an easy transition.

Anyone wanting to place a bet on Nvidia at this point should feel pretty good about its prospects -- even as its PC business slowly erode. The market knows this and so does Nvidia. But at current levels, I think the risk-reward tradeoff favors Nvidia. And it is not too unrealistic to expect the stock to trade in the $15-to-$20 range over the next 12 to 16 months.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.